Can Hennes & Mauritz pull a spring rabbit out of the hat?

Can Hennes & Mauritz pull a spring rabbit out of the hat after a tough first quarter and a generally challenging period for clothing retailers?

When does H&M report earnings?

Hennes & Mauritz (HMB:SS) reports first quarter (Q1) numbers on Wednesday 1 April and it may make for some difficult reading.

H&M earnings – what to expect

From the trading update, released on 15 March 2021, we already know that was a tough quarter. It told shareholders then that net sales, for the period 1 December 2020 to 28 February 2021, fell by 21% in local currencies, compared with the same period last year. It made it clear to investors that the ‘sales development was significantly affected by the Covid-19 situation, with extensive restrictions and at most over 1800 stores temporarily closed’.

Better times ahead?

Compared to some other clothing retailers it could be argued that with its geographical and sub-sector spread, H&M is in a good situation and may be well placed to benefit from the emergence from a winter dominated by coronavirus driven lockdowns.

H&M has reported that, since the beginning of February, a number of its markets have begun to reopen, as lockdowns come to an end. While it said in mid-March that, of its near 5000 stores, around 1300 were closed, but online sales have continued to develop very well which helps mitigate some of the downturn.

Lockdown pressures

Unfortunately, since the sales update two weeks ago, Germany, which is H&M’s largest market, and France, particularly, have been badly hit by a third wave of the pandemic. This will doubtless give a negative twist to the outlook from these quarterly results when they are released.

Between 1 and 13 March, H&M’s German sales had risen by 10%, but this may change and traders should watch out for any negative commentary around the Covid-19 pressures that are still clearly evident.

China bans big brands

If the difficulties presented by the coronavirus are not enough, it comes as H&M , like other Western brands, are facing backlash in China. The issue there is that western companies are finding themselves in the political cross hairs over China’s treatment of the Uighur Muslims in the country's Xinjiang region.

Household names are being taken out on a regular basis, the most recent being Hugo Boss. The Chinese celebrity Li Yifeng said on his Weibo social media account that he was ending his relationship with Hugo Boss after the German fashion house said it would not tolerate forced labour, under any circumstance, and asked that its global suppliers follow on behind.

The H&M brand has now also found itself on the wrong side of the Chinese authorities. Its clothing range has been removed from Alibaba’s listings on its shopping app., according to reports on the Reuters newswires.

H&M share price: technical analysis

Interestingly, the chart* has recently taken a turn for the worse.

The drop coincides with the trading update released on 15 March. The writer therefore poses the question as to whether all the bad news, that we have already seen, has now been priced in?

Possibly not, as the message then was that Germany was going well and there has, subsequently, been a change there as Covid-19 picks-up again.

So, if there is another poor statement, the highs, marked on the chart by the shooting star candle at the latest peak, at those May 2017 levels, may not be seen again in the near future. As at the time of writing the most recent candle is a bearish engulfing sign and this, alongside the direction of the moving average convergence/divergence (MACD) and relative strength index (RSI) at the bottom would suggest a downward trend is in place. If this is confirmed by the release on Wednesday morning then a short trade from current levels would seem to be where the keen money may be headed. A short position would be accompanied by a stop loss above the recent near four-year highs.

Set for a surprise?

If there is a positive surprise, and the business does manage to pull a spring rabbit out of the Hennes & Mauritz hat, then there is every chance that those recent highs may be challenged. This should then be reflected in a long position with a stoploss below the 175 support line.

The news is expected to be published before the markets open on Wednesday 31 March.

Footnotes:

* Chart dated Monday 29 March

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